Chapter 6: The Governmental Fund Accounting Cycle
Capital Projects Funds, Debt Service Funds, and Permanent Funds
Multiple Choice
1. What is the purpose of a Debt Service Fund?
a. to account for resources that are restricted or otherwise limited to pay the debt service on all debt of the government, including Enterprise fund debt and short-term debt used to finance General Fund operations
b. to account for resources that are restricted or otherwise limited to pay principal and interest on general long-term debt
c. to account for resources that are restricted or otherwise limited to pay the debt service on all long-term debt of the government, and also to show how much long-term debt is outstanding
d. to provide a means of reporting all outstanding long-term debt of the government in a single location
Answer: b
2. At what point should interest be recognized as an expenditure in a Debt Service Fund?
a. when it accrues
b. when it is paid
c. when it is due and payable
d. when the bonds resulting in payment of interest are issued
Answer: c
3. A city sells $5 million of 20-year general obligation bonds on October 1, 2013. Interest on the debt is payable at the rate of 5% a year on the unpaid balance of the debt, every six months commencing March 31, 2014. How much should the city report as an interest expenditure in the Debt Service Fund for the calendar year ending December 31, 2013?
a. $0
b. $30,000
c. $60,000
d. $120,000
Answer: a
4. A city sells $15 million of general obligation bonds on October 1, 2013. The bonds mature at the rate of $1 million a year each September 30, starting September 30, 2014. The amount due September 30, 2014 is paid. How much should the city report as outstanding debt in the Debt Service Fund in its year-end fund level financial statements on December 31, 2014?
a. $15,000,000
b. $14,000,000
c. $13,750,000
d. $0
Answer: d
5. A city sells $5 million of 6% ten-year general obligation bonds on April 1, 2013. The first installment of debt principal ($250,000) is due to be paid on September 30, 2013. What entry should the city make on September 30, 2013 in the Debt Service Fund regarding the bond principal?
a. It should recognize a $250,000 liability for Matured bonds payable.
b. It should reduce the $5 million long-term liability by $250,000.
c. It should do nothing in the Debt Service Fund, but it should reduce Bonds payable by $500,000 in the Capital Projects Fund
d. It should make no entry anywhere until the principal is actually paid.
Answer: a
6. A city keeps its books on a calendar year basis. On April 1, 2013, the city sold $500,000 of 6% general obligation bonds, payable in semi-annual installments. The first installment, due October 31, 2013 covered interest of $15,000 and principal of $25,000. For the year ended December 31, 2013, how much should the Debt Service Fund report as expenditures?
a. $15,000
b. $40,000
c. $15,000, plus an accrual for three months' interest
d. $40,000, plus an accrual for three months' interest and principal
Answer: b
7. What kinds of expenditures are accounted for in Debt Service Funds?
a. only the principal payments on general obligation long-term debt
b. only the interest expenditures on general obligation long-term debt
c. both principal payments and interest expenditures on general obligation long-term debt
d. all debt service on all governmental debt, regardless of the purpose of the debt
Answer: c
8. A state issues long-term debt to finance a major construction project. The first installment of debt service requires payment of principal of $75,000 and interest of $100,000. Which of the following statements is true on the day that payment for principal and interest is legally due?
a. expenditures of $175,000 should be recognized in the debt service fund.
b. expenditures of $75,000 should be recognized in the capital projects fund and expenditures of $100,000 should be recognized in the debt service fund.
c. expenditures of $100,000 should be recognized in the debt service fund and bonds payable should be reduced by $75,000 in the debt service fund.
d. expenditures of $175,000 should be recognized in the debt service fund and bonds payable should be reduced by $75,000 in the capital projects fund.
Answer: a
9. In what circumstances are Debt Service Funds required to be used in governmental accounting?
a. a legal requirement dictates that a Debt Service fund be established
b. a government is currently accumulating resources for the payment of principal and interest on long-term debt in future years
c. a government issues general obligation bonds
d. both a and b
e. both a and c
Answer: d
10. In what circumstance is a Capital Projects Fund required to be used in governmental accounting?
a. to record the acquisition or construction of all capital assets
b. to record the acquisition or construction of any capital asset that is not recorded in an Enterprise Fund
c. when capital projects are at least partially financed by general obligation bond proceeds
d. to record the acquisition or construction of all major capital assets, except infrastructure assets
Answer: c
11. Accrued interest on the following type of debt is reported in a governmental fund:
a. short-term tax anticipation notes payable
b. serial bonds
c. general obligation bonds
d. long-term bank notes
Answer: a
12. Which of the following groups of accounts best describes the types of assets and liabilities likely to be found in Capital Projects Funds?
a. cash, investments, construction contract payable, matured bonds payable
b. cash, buildings, equipment, construction contracts payable
c. cash, investments, construction contracts payable, vouchers payable, long-term debt payable
d. cash, investments, retainage payable, vouchers payable
Answer: d
13. A city accounts for its capital acquisitions using encumbrances. When the city enters into a contract to acquire equipment, what journal entry should it make?
a. debit expenditures - capital outlay; credit vouchers payable
b. debit encumbrances; credit budgetary fund balance reserved for encumbrances
c. debit equipment; credit vouchers payable
d. debit encumbrances; credit appropriations - equipment
Answer: b
14, 15, and 16. The following set of facts applies to questions 14, 15, and 16: A state constructs an office building. The construction is financed with: (1) a transfer of $1 million from the General Fund; (2) a grant of $2 million from the federal government; (3) bond proceeds of $7 million; and (4) earnings of $100,000 from temporary investment of bond proceeds. All transactions occur in one year.
14. Based on the preceding set of facts, how much should be reported as Revenues in the Capital Projects Fund?
a. $100,000
b. $2,100,000
c. $3,100,000
d. $8,100,000
Answer: b
15. Based on the preceding set of facts, how much should be reported as Other financing sources in the Capital Projects Fund?
a. $1,000,000
b. $3,000,000
c. $8,000,000
d. $10,000,000
Answer: c
16. Based on the preceding set of facts, what should be reported in the financial statements of the General Fund for the year?
a. other financing uses of $1 million
b. expenditures of $1 million
c. other financing sources of $2 million and other financing uses of $1 million
d. revenues of $2 million and other financing sources of $7 million
Answer: a
17. A city issues $5 million of long-term general obligation bonds to construct a new fire house. How and where should that transaction be recorded?
a. as an other financing source in the debt service fund
b. as a liability in the capital projects fund
c. as a liability in the debt service fund
d. as an other financing source in the capital projects fund
Answer: d
18. What does the account, retainage payable, represent in the financial statements of a Capital Projects Fund?
a. a long-term liability
b. an amount owed to other governments because capital grant provisions were not met
c. an amount held back by a government when paying a contractor
d. an amount that can be reported in the General Fund, but not a Capital Projects Fund
Answer: c
19. A city acquired two vehicles in a particular year: (1) a sedan for $20,000 that was paid for through the General Fund and (2) a sanitation truck for $125,000 that was paid for through the Capital Projects Fund. How should the assets be reported in the city's fund-level financial statements?
a. $145,000 should be reported as assets in the general fund
b. $20,000 should be reported as assets in the general fund and $125,000 should be reported as assets in the capital projects fund
c. $145,000 should be reported as assets in the capital projects fund
d. neither acquisition should be reported as assets in the fund-level financial statements
Answer: d
20. Which of the following fund types is most likely to have the shortest "life"?
a. internal service
b. capital projects
c. enterprise
d. special revenue
Answer: b
21. A city constructs a new building by issuing debt in the amount of $3 million. How should the city report the debt proceeds in its Capital Projects Fund statement of revenues, expenditures, and changes in fund balance?
a. as a revenue
b. as an other financing source
c. as a liability captioned general long-term obligations
d. as a liability captioned due to the debt service fund
Answer: b
22. Depending on the restrictions placed on resources used to acquire a police car, the acquisition of the car could be reported in which of the following funds?
a. general fund
b. special revenue fund
c. capital projects fund
d. all of the above
e. none of the above
Answer: d
23. How should a fixed asset acquired through a capital lease agreement be recorded in a General Fund?
a. at the present value of the future lease payments, by debiting expenditures and crediting other financing sources - capital leases
b. at the total amount of the future lease payments, by debiting expenditures and crediting other financing sources - capital leases
c. at the present value of the future lease payments, by debiting expenditures and crediting capital leases payable.
d. no entry is needed until payments are actually made on the capital lease agreement.
Answer: a
24. A city acquires equipment on January 1, 2013 by means of a capital lease agreement. The agreement calls for paying the leasing company $300,000 in three $100,000 annual payments, starting December 31, 2013. The present value of the three lease payments, using a 6% interest rate, is $267,300. The city will make the lease payments from the General Fund. What journal entry should the city make on January 1, 2013 in the Fund?
a. debit expenditures - capital outlay; credit other financing sources, for $300,000
b. debit expenditures - capital outlay; credit other financing sources, for $267,300
c. debit capital assets; credit capital leases payable, for $300,000
d. debit expenditures - capital outlay; credit capital leases payable, for $267,300
Answer: b
25. A Debt Service Fund accumulates resources to retire debt that is due in a lump sum in the year 2014. The Fund held marketable securities that cost $900,000 when purchased during 2006 and 2007. The securities had fair market values of $875,000 on January 1, 2013, and $930,000 on December 31, 2013. The average fair market value during the year was $895,000. At what amount should the Fund report the securities in its balance sheet on December 31, 2013?
a. $875,000
b. $895,000
c. $900,000
d. $930,000
Answer: d
26. The operations of a debt service fund generally are controlled by which of the following mechanisms?
a. bond indentures
b. encumbrance accounting
c. legislative oversight and review
d. break-even analysis
Answer: a
27. Capital assets that were financed through governmental fund activities will appear in which financial statement?
a. government-wide statement of net assets
b. capital projects fund balance sheet
c. debt service fund balance sheet
d. enterprise fund balance sheet
Answer: a
28. Retainage payable will most likely appear in which financial statement?
a. government-wide statement of net assets
b. capital projects fund balance sheet
c. debt service fund balance sheet
d. special revenue fund balance sheet
Answer: b
29. The largest dollar amount of resources flowing into a capital projects fund normally will come from
a. dedicated property taxes
b. user charges
c. bond proceeds
d. interest on investments
Answer: c
30. The largest dollar amount of resources flowing into a general obligation debt service fund normally will come from
a. tax revenues and interfund transfers
b. interest on investments and user charges
c. fiscal agent fees and fines
d. liquidation of encumbrances
Answer: a
31. What type of fund is most likely used to account for the spending of income earned by a Permanent Fund?
a. agency fund
b. private-purpose trust fund
c. enterprise fund
d. special revenue fund
Answer: d
32. Which of the following is a characteristic of a Permanent Fund?
a. both the corpus of the fund and its earnings must be kept intact permanently.
b. permanent funds are created to support programs that benefit other governmental units.
c. earnings of a permanent fund are used to support programs that benefit the government or its citizens.
d. permanent Funds are established when a government receives a bequest without a legal trust agreement.
Answer: c
33. How should marketable securities be valued when reported in a Permanent Fund’s balance sheet?
a. at the cost to the donor of the investments
b. at the fair value of the investments on the date received by the government
c. at the fair value of the investments as of the balance sheet date
d. at the amount paid to acquire the securities
Answer: c
34. A capital project is completed, but $500,000 remains in a capital projects fund. How should the government use the $500,000 remaining in the capital projects fund?
a. the government should retain the remaining funds in the capital projects fund for a potential future capital project
b. the government should consult provisions of relevant grant and bond issues, which may provide guidance regarding its use
c. the first-in, first out basis
d. residual amounts in a capital projects fund after completion of a project must be transferred to a debt service fund